The Do’s and Don’ts of Financing a Franchise

Author: Kenny Chan, Vice President, Content & Marketing

The Canadian franchise landscape is evolving. Interest in self-employment has increased as a result of the pandemic and according to the Canadian Franchise Association (CFA), 94% of Canadians say they’re looking to invest in a franchise within the next year. Despite months of economic uncertainty, franchising has come out as a clear frontrunner for so many Canadians re-evaluating their next career move. And, for very valid reasons.

Franchising offers the flexibility of entrepreneurship, backed by a proven business concept that consumers recognize and trust. We have seen many Canadians through the course of the pandemic take their career and their financial situation into their own hands and explore franchise ownership.

For those considering joining the franchise community, but don’t know where to start, it’s important to understand some of the industry’s biggest misconceptions that may be holding a potential franchisee back from being their own boss. One of the most common questions, can I afford franchise ownership? While some franchise systems have high initial fees, investments required to open a franchise can start at as little as $10,000, depending on the type of business, making franchising an accessible and affordable entrepreneurial opportunity for almost everyone.

If you are looking to take the plunge into becoming your own boss by owning your own franchise, and have already taken the first steps of identifying the right business concept for you, the cost of acquiring it should be the last thing stopping you from realizing your dreams of financial independence. Not often do prospective franchisees have the cash on hand to start a business, that said there are various avenues one can take to acquire the financial support needed to start their journey in franchising, including several government and financial institutional grants and subsidies available to new entrepreneurs.

To help set potential franchisees up for success, here are some do’s and don’ts to consider before starting your journey:

DO:

DO have a conversation with the franchisor

Often people think financing has to come from a bank. However, the first conversation you should be having is with the franchisor, since many established brands may offer tailored financing options for potential preferred franchisees either through a partnership with a preferred lender or directly from within. A benefit of franchisor financing is that the corporation then becomes a one-stop-shop for all your needs, whether those needs include franchise fees, resources, or even equipment purchases. This is a great option for a first time franchisee because who knows the business better than the franchisor?

DO consider all funding options

If financing through a franchisor is not an option, financial institutions become a great solution. In addition to these two options, one of the most common ways to finance a franchise is through friends and family.  We have seen a lot of family and friends come together to support franchise ownership in a variety of different ways, including  everything from loan support to bringing in a family member or friend as a business partner. Like any partnership however, the most crucial thing to consider  is to have a written contract detailing the terms of the partnership, as well as any repayment terms to prevent disagreements down the road.

DON’T:

DON’T stop trying if you are rejected by a bank

Prospective franchisees go to a bank assuming they will automatically get a loan if they have good credit and their personal finances are in order. This is not always the case and sometimes franchisee hopefuls can still be rejected despite checking off all the predetermined boxes. The important thing to remember is don’t give it up! Failure to secure funding from a bank might not have anything to do with you. A particular bank may simply not be interested in adding/supporting a specific concept to their portfolio. Do your research to find a bank that knows the franchise landscape and go in with prior knowledge of what types of businesses they have loaned to in the past.

DON’T underestimate how much money you will need

This goes back to having an initial conversion with the franchisor of your prospective franchise system. It’s really important to know how much you’ll need in total to get your franchise off the ground, not just for the initial start-up fees. One of the main causes of franchise failure is insufficient funding and not planning for all financial obligations down the line. Always include a buffer when taking out a loan as this will be used for any unexpected foreseeable costs and can help ensure your franchising journey is a success from start to finish.

Though there are a few more steps to owning your franchise, by ensuring you have a structured financial plan you have already tackled one of the first and probably most important steps. Whether you choose traditional bank loans, franchisor financing, assistance from friends and family, or any number of other financing options, congratulations on taking the first step to becoming your own boss and franchise ownership.